Int'l Swaps & Derivatives Ass'n v. U.S. Commodity Futures Trading Comm'n

887 F.Supp.2d 259

INTERNATIONAL SWAPS AND DERIVATIVES ASSOCIATION, et al., Plaintiffs,

v.UNITED STATES COMMODITY FUTURES TRADING COMMISSION, Defendant.

Civil Action No. 11–cv–2146 (RLW).

United States District Court, District of Columbia.

Sept. 28, 2012.

Eugene Scalia, Jason J. Mendro, John Franklin Bash, Miguel A. Estrada, Gibson, Dunn & Crutcher LLP, Washington, DC, for Plaintiffs.

Jonathan L. Marcus, Lawrence Demille–Wagman, Mary T. Connelly, Ajay Bhagwandas Sutaria, U.S. Commodity Futures Trading Commission, Washington, DC, for Defendant.

MEMORANDUM OPINION

ROBERT L. WILKINS, District Judge.

Plaintiffs International Swaps and Derivatives Association (“ISDA”) and Securities Industry and Financial Markets Association (“SIFMA”) (collectively “Plaintiffs”) challenge a recent rulemaking by Defendant United States Commodity Futures Trading Commission (“CFTC” or “Commission”) setting position limits on derivatives tied to 28 physical commodities. SeePosition Limits for Futures and Swaps, 76 Fed.Reg. 71,626 (Nov. 18, 2011) (“Position Limits Rule”). The CFTC promulgated the Position Limits Rule pursuant to the Dodd–Frank Wall Street Reform and Consumer Protection Act, Pub.L. No. 111–203, 124 Stat. 1376 (2010) (“Dodd–Frank”).

The heart of Plaintiffs' challenge is that the CFTC misinterpreted its statutory authority under the Commodity Exchange Act of 1936 (“CEA”), as amended by Dodd–Frank. The central question for the Court, then, is whether the CFTC promulgated the Position Limits Rule based on a correct and permissible interpretation of the statute at issue. Before the Court are the following motions: 1) Plaintiffs' Motion for Preliminary Injunction (Dkt. No. 14), Plaintiffs' Motion for Summary Judgment (Dkt. No. 31) and Defendant's Cross Motion for Summary Judgment (Dkt. No. 38). For the reasons set forth below, Plaintiffs' Motion for Summary Judgment is GRANTED, the CFTC's Cross–Motion for Summary Judgment is DENIED, and Plaintiffs' Motion for Preliminary Injunction is DENIED AS MOOT.¹

FACTUAL BACKGROUND

ISDA is a trade association with more than 825 members that “represents participants in the privately negotiated derivatives industry.” (Compl. ¶ 9). SIFMA is an “association of hundreds of securities firms, banks, and asset managers” whose claimed mission is to “support a strong financial industry, investor opportunity, capital formation, job creation, and economic growth, while building trust and confidence in the financial markets.” ( Id. ¶ 10). According to Plaintiffs, the commodity derivatives markets are “crucial for helping producers and purchasers of commodities manage risk, ensuring sufficient market liquidity for bona fide hedgers, and promoting price discovery of the underlying market.” ( Id. ¶ 15). The CFTC, of course, is an agency of the U.S. government with regulatory authority over the commodity derivatives market.

Relevant Derivatives Contracts

Three types of commodity derivatives are implicated in this case: futures contracts, options contracts and swaps. (Dkt. No. 31 at 5). A futures contract is a contract between parties to buy or sell a specific quantity of a commodity at a particular date and location in the future. ( Id. at 3). An options contract is a contract between parties where the buyer has the right, but not the obligation, to buy or sell a specific quantity of a commodity at a point in the future. ( Id.). Futures contracts and options contracts result in either physical delivery or a cash settlement between parties. ( Id.). In a physical delivery contract, the buyer takes physical delivery of the commodity when the contractexpires. ( Id.). At the conclusion of a cash-settled contract, a cash transfer occurs that is equivalent to the difference between the price set forth in the contract and the market price at the time the contract expires. ( Id.). Swaps involve one or more exchanges of payments based on changes in the prices of specified underlying commodities without transferring ownership of the underlying commodity. ( Id. at 5).

A position limit “caps the maximum number of derivatives contracts to purchase (long) or sell (short) a commodity that an individual trader or group of traders may own during a given period.” (Compl. ¶ 21). A position limit may impose a ceiling on either a “spot-month” position or a “non-spot-month” position. ( Id. at ¶ 22). A “spot month” is a specific period of time (which varies by commodity under the rules) that immediately precedes the date of delivery of the commodity under the derivatives contract. ( Id.). As Plaintiffs explain, “[a] spot-month position limit, therefore, caps the position that a trader may hold or control in contracts approaching their expiration. A non-spot-month position limit caps the position that may be held or controlled in contracts that expire in periods further in the future or in all months combined.” ( Id.).

Commodity Exchange Act of 1936 and the 2010 Dodd–Frank Amendments

The main issue in this case is whether the Dodd–Frank amendments to Section 4a of the CEA (codified at 7 U.S.C. § 6a) ² mandated that the CFTC impose a new position limits regime in the commodity derivatives market. It is undisputed that, prior to Dodd–Frank, the CEA vested the Commission with discretion to set position limits on futures and options contracts in commodity derivatives markets. See7 U.S.C. § 6a (stating that CFTC has authority to proclaim and fix position limits “from time to time” “as the Commission finds are necessary to diminish, eliminate, or prevent [excessive speculation].”). Title VII of the Dodd–Frank Act amended Section 6a in several respects. The full text of Section 6a, with the Dodd–Frank amendments reflected in red-lined format, is attached to this Opinion as Appendix A.

The Position Limits Rule

Notice of Proposed Rulemaking

Dodd–Frank went into effect on July 21, 2010. On January 26, 2011, the CFTC issued a Notice of Proposed Rulemaking (“NPRM”), stating that Title VII of Dodd–Frank “requires” the Commission “to establish position limits for certain physical commodity derivatives.” Position Limits for Derivatives, 76 Fed.Reg. 4,752 (Jan. 26, 2011). At an open meeting on January 13, 2011 prior to the issuance of the NPRM, Commissioner Michael V. Dunn stated that, “to date CFTC staff has been unable to find any reliable economic analysis to support either the contention that excessive speculation is affecting the market we regulate or that position limits will prevent excessive speculation.” Transcript of Open Meeting on the Ninth Series of Proposed Rulemakings Under the Dodd–Frank Act at 9 (Jan. 13, 2011). Dunn also shared his “fear” that “at best position limits are a cure for a disease that does not exist, or at worst it's a placebo for one that does.” Id. Commissioners Jill Sommers and Scott D. O'Malia also expressed fundamental concerns with the position limits proposal before the agency. Id. at 12–15; 18–22.

In the NPRM, the CFTC proposed to establish position limits for futures contracts, options contracts and swaps for 28 physical commodities. In discussing its statutory authority, the CFTC stated its view that it was:

not required to find that an undue burden on interstate commerce resulting from excessive speculation exists or is likely to occur in the future in order to impose position limits. Nor is the Commission required to make an affirmative finding that position limits are necessary to prevent sudden or unreasonable fluctuations or unwarranted changes in prices or otherwise necessary for market protection. Rather the Commission may impose position limits prophylactically, based on its reasonable judgment that such limits are necessary for the purpose of ‘diminishing, eliminating, or preventing’ such burdens on interstate commerce....

76 Fed.Reg. at 4754 (emphasis added). The CFTC stated that the “basic statutory mandate in section [6]a of the Act to establish position limits to prevent ‘undue burdens' associated with ‘excessive speculation’ has remained unchanged—and has been reaffirmed by Congress several times—over the past seven decades.” Id. In discussing the Dodd–Frank amendments to Section 6a, the Commission noted that:

[P]ursuant to the Dodd–Frank Act, Congress significantly expanded the Commission's authority and mandate to establish position limits beyond futures and options contracts to include, for example, economically equivalent derivatives. Congress expressly directed the Commission to set limits in accordance with the standards set forth in sections [6]a(a)(1) and [6]a(a)(3) of the Act, thereby reaffirming the Commission's authority to establish position limits as it finds necessary in its discretion to address excessive speculation.

Id. at 4755 (emphasis added). At this stage of the rulemaking, therefore, when discussing the “standards set forth in section [6]a(a)(1),” the Commission directly referred to its authority to “establish position limits as it finds necessary in its discretion to address excessive speculation.” Id.

The Final Rule

During an open meeting on October 18, 2011, the CFTC adopted the Position Limits Rule by a vote of 3 to 2. 76 Fed.Reg. at 71,699. Chairman Gary Gensler and Commissioner Bart Chilton voted in favor of the Rule, with Commissioner Dunn providing the third vote for the majority. (Dkt. No. 31 at 10–11); 76 Fed.Reg. at 71,699. Dunn stated that “no one has presented this agency any reliable economic analysis to support either the contention that excessive speculation is affecting the market we regulate or that position limits will prevent the excessive speculation.” Transcript of Open Meeting on Two Final Rule Proposals Under the Dodd–Frank Act (hereinafter “10/18/11 Tr. at –––”) at 13 (Oct. 18, 2011). Dunn expressed his opinion that “position limits may harm the very markets we're intending to protect.” Id. at 14. Despite the fact that his opinion on position limits still “ha[d] not changed,” Dunn voted in favor of the Rule because he believed Cong...